An interview with

Aidan Place

The death of a business partner can cause considerable upheaval to the company, as well as to the people involved. In this article, Aidan Place from Amber River NI looks at some of the key questions and planning options that business owners should consider.

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As a company owner, director, or business partner, it’s likely your business is one of your most important assets - if not your life’s work. It might, therefore, be difficult to imagine everything being turned upside-down by the death of a business partner, especially if you've worked together for a long time.

But in reality, it’s possible that one of you may die long before your planned retirement. If that were to happen without the right protection in place, it could result in massive disruption to your business – as well as uncertainty for you, the deceased’s family, and any other parties involved with the business.

All parties must understand exactly what would happen if you or another business partner die - there must be no confusion

How to plan for business continuity

The best place to begin is by asking yourself some important – if uncomfortable – questions. For example, if your business partner died:

  • What do you think would happen to the business?
  • Do you have a good understanding of its ownership model?
  • Would there be any conflicting priorities and future plans for the business between you, other business partners and the deceased’s family?
  • Will suppliers and creditors extend the same credit and terms of business they always have, or will they begin to pull back?
  • Will your customers maintain their confidence in your products and services?
  • Would your most essential employees stay with the business or go elsewhere?

Only after those questions have been answered can you begin to take protective steps. This will usually include putting a legally binding contract (known as a cross-option agreement) in place, which dictates what should happen if those circumstances arise.

You can make this contract as complicated, or as simple, as you need it to be. It can cover a broad variety of possible situations too. But the key point is that when all parties understand exactly what will happen if you or another business partner die, there must be no confusion.

The options available after the death of a business partner

When a business partner dies, you are likely to be presented with several different options.

Liquidating the business and distributing the remaining assets

Depending on how long the business has been going, and how much you have invested in terms of time and money, this may be your least preferred option.

It’s also important to consider whether liquidation would mean the sudden loss of a steady income, and whether the market conditions mean it’s a good time to sell. If not, you may get considerably less for your business and its assets then they are worth.

Taking on your late business partner’s heirs as new associates

This option could also be problematic, especially in cases where those heirs are not as experienced, capable, enthusiastic, or willing to negotiate as your late business partner was.

Selling your share of the business to the heirs

Unfortunately, this option can lead to a lot of disheartening haggling about the purchase price of the business. It can also lead to damaged relationships and other heart-breaking considerations that you know your late business partner might never have allowed.

Buying out the heirs’ share of the business

This is often the most practical choice for everyone concerned. It keeps the business in the hands of someone who wants to run it, and the heirs get to enjoy the financial rewards.

However, you still have to negotiate price and terms, and then come up with the money. This is where a ‘buy/sell’ arrangement (usually a clause within a legally-binding contract) can be useful. It calls for the surviving partner to buy (and the heirs to sell) the deceased’s share in the business. It can also specify the selling price, or an agreed method for determining it in the future.

Partner Protection Insurance will enable the remaining partner to purchase the late partner’s share of the business

Funding the buy-out of the late partner’s heirs

Cash buyout

Where the surviving partner is given the option to buy the shares owned by the late business partner, and a buy/sell agreement exists, one approach might be to try and pay this in cash. However, there are several potential drawbacks.

For example, the funds may not be easily available or accessible at the time of the business partner’s death, or it could deplete the surviving partner’s savings. And from the perspective of the seller, the accumulation of cash may cause additional tax problems.

Funding the buyout with a loan

Instead, the surviving business partner may choose to borrow the funds required (usually in the form of bank loans). However, just as with a cash purchase, borrowing has potential pitfalls to be mindful of.

For example, when trying to borrow, the death of the business partner may make it harder to have the loan approved. The future growth of the business may be questioned due to the cost of having to repay the loan. And the death of the business partner may cause sales to decline, compounding the problem. This could ultimately mean the surviving partner has to expose personal assets – for example, by potentially re-mortgaging their home – to fund the buyout.

Funding the buyout with an insurance policy

However, there is another option available to business owners. This comes in the form of Partner Protection Insurance or a Shareholder Protection Plan, depending on your company status.

By taking out this type of life insurance policy, you can ensure that should one partner die, the surviving business partner will receive a lump sum from the insurance company. This lump sum will enable them to purchase the late partner’s share of the business.

Most business owners are too busy running their business day-to-day to spend time thinking about the future

The process typically works like this:

• A cross-option agreement is established, which clearly states the purchase of the deceased’s partner’s shares will be made by the remaining partners
• Life insurance policies are arranged for each partner, where the sum insured is equal to their share in the business
• The policies are placed into trust, to ensure there are no tax implications when the lump sum is paid out

The benefits of this type of policy are that the proceeds will be available almost immediately after the death of the business partner, ensuring the business can continue uninterrupted. The policy can be adjusted as the business grows too.

More importantly though, it gives all partners (and their families) much-needed peace of mind that uncertainty can be avoided, the business can continue, and heirs can extract the value from the business that is rightfully theirs.

Helping you to take care of your business

Most business owners are too busy running their business day-to-day to spend time thinking about the future. And when that future is potentially an unpleasant one, it can be even harder to set aside time to make the necessary plans.

But when it comes to securing the long-term future of your company, it makes sense that everyone involved knows where they stand before the worst happens. Whatever option is best for you, it helps to have all the facts before making a decision. Your legal and tax advisors, along with your financial planner, can help you create a business continuity arrangement that meets everyone’s needs.

You may be interested in Aidan’s expert insights about how people can protect themselves financially if they were to fall ill: Is critical illness worth the cost?

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.